Donald Coxe – Investment Recommendations (September 2009)

The September edition of Donald Coxe’s Basic Points research report (subtitled “Dem Blues”) has just been published. His investment recommendations, as summarized in this document, are listed in the paragraphs below, but I do recommend you also read the full report at the bottom of the post. (Also note that Donald’s weekly webcasts can be accessed from the sidebar of the Investment Postcards site.)

1. Upgrade equity portfolios to reduce endogenous risk. Trade upward in quality, and, in balanced accounts, increase bond exposure. There is, at present, too much froth for comfort. After the grandest recession /recovery stock market rally on record, this is hardly a good time to commit new money into equities.

2. Emphasize Canadian stocks in North American portfolios. Canada has the best banks, and the best range of commodity-oriented stocks. And it has the best North American currency.

3. Continue to overweight commodity-oriented companies in diversified equity portfolios. They have been underperforming the US market since US stocks began to reach the top of the troposphere, and their most volatile and gaseous members soared into the stratosphere. If the economic bulls are right, commodity prices will soar. If it takes more time – and some signs of restraint in Washington – to launch a sustained US recovery, then commodity stocks will have the attraction that comes from producing goods priced by the new Asian economic leaders.

4. The regional banks index (KRE) has not participated in the broad rally recently, and is sharply underperforming the S&P, mostly because of widespread construction loan losses. The BKX has more than doubled since March, but it is dominated by the banks that got the most help from Washington, so we have trouble seeing that steroid-based performance as the signal to buy stocks. Until the KRE starts to show good relative strength, the rally remains suspect, and investors should be lightening up on financial stocks.

5. Until this week, gold had been range-bound this year, so gold shares sharply underperformed the market. On Tuesday, bullion staged a sudden upside breakout from its pennant pattern, which could signal a sustained move through $1,000. As we were going to press, it had moved through $990. Gold shares are attractive havens, because gold is the only asset that can be expected to outperform under both extreme scenarios – financial collapse and runaway inflation. Remain overweight gold within commodity-oriented portfolios.

6. Whether by coincidence or otherwise, crude oil has been trading rather closely to the S&P. Oil consumption statistics do not support a valuation of $70 for crude oil. We recommend caution on oil stocks here.

7. Natural gas is, along with pork (but not of the Washington variety), the most conspicuous loser among the commodities. Technology (in the form of large-scale application of new techniques for developing huge shale gas deposits) and cool summer weather have depressed gas prices. Even a cold winter may not be enough to get gas prices to levels at which most producers could show good profits. Underweight gas-prone companies in commodity portfolios.

8. The prospect of record US corn crops has depressed the price of agricultural companies’ shares. However, the food sector remains the least cyclical and speculative of the main four commodity stock groups and should be emphasized. We are still only one big crop failure away from a global food crisis.

9. The bull market in corporate bonds has narrowed spreads remarkably. In effect, virtually all risk classes have been in simultaneous bull markets – a sure sign that liquidity is the basic driving force. The steep yield curve argues for longer durations in bond portfolios, but unmistakable proof that the US had emerged from recession risks would send investors scurrying to midterms and force Bernanke’s hand. Since we think a V-Shaped recovery is the least likely outcome, we now recommend increasing bond durations, and are reversing the trading recommendation issued in June, when we were increasing our recommended equity exposure in line with our view that both the bond and stock markets were going to price in an economic recovery. The stock market did: the bond market didn’t.